The U.S. Dollar Is Going Parabolic – Something Somewhere Is Collapsing

Marketvane’s Bullish Consensus for the $US hit 90% yesterday. At the beginning of March it was 83%. Market bullish sentiment toward the dollar has not been this bullish since the turn of the millenium. It is a very strong contrarian signal…

The US Dollar index is going parabolic. More often than not, markets that go parabolic will crash. This is what happened with the dollar in 2008 (click to enlarge):

The common “narrative” out there is that the dollar squeeze is being fueled by European sovereign and corporate entities scrambling for dollars in order to pay dollar-denominated debt obligations. Yes, this is part of the equation. But, just like in 2008, it is a sympton of a castrophic underlying systemic problem. After all, the Fed has created close to $4 trillion in new dollars, $2.6 trillion of which are sitting in the excess reserve account of the big banks at the Fed earning interest. That’s $2.6 trillion in excess dollars that can used to fund any excess demand for dollars.

There’s also a repo collateral short squeeze plus a vicious Treasury short-squeeze going on, especially in the middle of the curve, where the Fed has removed most of the supply. But again, these are all “symptoms” of an underlying problem. Let’s not forget that the price of oil, along with many other key economic indicators are collapsing right now.

I believe that the collapse in the energy sector has triggered a silent derivatives counterparty bomb that we can’t see because of the intentional opacity of the OTC derivatives market. But you don’t have a 50% collapse in a key economic commodity like oil – a commodity which has $100’s of billions in OTC derivatives securities wrapped around it – without some kind of counterparty default tsunami that has been triggered. Throw on top of that the Greece situation and you have a recipe for a derivatives financial nuclear meltdown.

Wall Street has been stunningly silent about the meltdown in the energy sector. There has not been one utterance about any derivatives connected to the situation. But we’ve seen at least two big energy junk bond issuers blow up. One of them did not even make the first interest payment on its debt. Without question there were OTC credit default swaps connected to this debt.

The parabolic dollar “short squeeze” storyline is what they want you see. I would suggest that something much bigger and catastrophic unfolding behind that curtain…

Conversely to the strength of the USD, you have the weakness of the other currencies to which the “value” of the USD is measured in, as shown by the USD index. Those other currencies are fast becoming “basket” cases!

Interesting to note that this current parabolic rise in the USD began at the end of June 2013. At the same time the world commodities index (DBC) started it’s dive, as did the Baltic Dry Index, along with the “swan dive” of the crude oil market! Strange? Is it not?

Dave, forget about the SCO. When you have your round table discussion the topic should be the collapse and melt-down of the financial system in the next few months. We are watching history in the making but in real-time. 😉

SOME Reasons for Lack of Lending? Certainly fear and lack of trust in counter-parties. Gold is perhaps being sold to raise dollars?

There is too much debt in the system
Creditworthy businesses do not want to expand in a deflationary world
Banks rightfully do not want to lend to credit-unworthy customers
Banks are still capital impaired in spite of what stress tests say
You cannot fix a debt problem with more debt

There are no other possible reasons that would explain the setup we are in. It is not a matter of confidence as Draghi believes.

The dollar soars………….

At some point however, this will reverse.

Why is there an overwhelming belief in dollars?

Three Reason for Belief in Dollars

Most believe the Fed will hike
The US stock market is rising
US interest rates are higher than Europe and Japan

Point number one is quite suspect. Yes, the Fed may very well get in a hike or two (or not). But if the Fed does not hike as much as expected, demand for dollars will likely sink quite rapidly.

Also consider point number two. Not only is the US dollar rising, so are US stocks. This creates a huge demand for dollars and various carry trades.

Right now, US stocks are a one-way and massively one-sided trade.

Point number three is likely to stay that way. But, it is relative moves and directions of moves that matter. In effect, if point number one disappoints, so will point number three.

Same as 2008 or Opposite?

Lehman Bankruptcy

On September 15, 2008, Lehman filed for bankruptcy. The dollar bottom was in April of 2008, at 71.33.

At that time, anti-US$ sentiment was massively in vogue.

The Schiff’s of the world were screaming hyperinflation. Today, US hyperinflationists are thoroughly discredited and in hiding.

Today, nearly everyone loves dollars and hates gold. Dollar swaps that were not in place then, are in place now. All things considered, conditions are nearly the opposite of 2008.

Swaps vs. Alphabet Soup

The Fed did not save the world with swaps.

Historian will surely debate Bernanke’s policy moves for the next century. Bernanke did initiate a huge number of lending programs (cleverly dubbed “Alphabet Soup” by Bloomberg columnist Caroline Baum).

Those lending programs eventually revived the corporate bond market in 2009. One of the programs was dollar swaps. It’s debatable if that was the key program.

If one wants to ignore all Bernanke’s mistakes that led to the crisis, and give him credit for “Alphabet Soup”, so be it. In fact that will be the nature of the future historical debate, and I doubt history will be so kind.

Expect New Script

The next crisis is highly unlikely to follow the 2008 script, because the 2008 script is what central banks have prepared for.

Bernanke, followed by Yellen, then the Bank of Japan and then the ECB have all carried competitive QE madness so far that a currency crisis is now baked in the cake. No one see its because it will not be “obvious” until long after it happens, just as with the dot-com bust and the housing bubble.

Central banks always strive to prevent the last crisis. In doing so, they plant the seeds for the next crisis. Unwarranted and counterproductive global QE is highly likely the seed for the next crisis.

But isn’t the FEAR limited to the mid and lower tier banks. As ioa4711 noted the taxpayers are on the hook for all the TBTF banks. It is no wonder that neither the banks nor our politicians want the FED audited…it is all a big ponzi scheme. There are no real assets backing all these derivatives or any of the governments’ humongous, and growing, obligations. This can’t end well.

You are correct. It is a strange paradox. If you have an honest government that can operate on a balanced budget, you don’t need a “gold standard”. But if you have a profligate government addicted to spending, then the gold standard won’t work. You can back all of today’s money with gold, at some price, but then how do you back the additional money that tomorrow inevitably brings. A sliding gold standard isn’t much of a standard.

The only FEAR limiter is to take the last and only available collateral (precious metals) and run from the ponzi scheme as far as you can run…
Somewhere deep down in the New Zealand forests you may escape the coming collapse. The very rich are already buying air strips and things …

Do something productive like buy my AMZN research report and see how to make some real money. Posting links to a zerohedge article from December that everyone has already read and laughed at does not qualify as “productive”

My best friend in NYC is a hedge fund consultant and he said EVERYONE is terrified of derivatives on Wall Street.

It’s not only the absolute value. Look also at the 1st and 2nd derivative. The dollar is going straight up. I think even silver at the crest of the hype in 2011 going to $49 wasn’t going that parabolic. And we are talking about the reservere currency of the world. A gigantic market by itself and even über-gigantic in comparison to the tiny silver market. Then you have all these useless derivates on top of it! It blows my fucking mind! There is so much tension in the system that you can be sure something will break. No more papering over to the next month or any other parlor trick. In New York they must be working overtime these days sweating their own blood. They deserve it! Fascist fuckers! 🙂

Greece, Ukraine, Russia vs. Europe, Syria, Libya, ISIS, Iran versus the oil producing Sunni world: The rest of the world is totally and directly exposed to these possible black swans so of course the dollar will be strong regardless of the theoretic financial causation. This is a geopolitical minefield and everybody is running scared.

Well, well, well… no “coincidence” that Netanyahoo! in Israel came over here to ‘talk’ to OUR(?) Congress now is it? The 17th Israel will hold elections that they have shuffled the date around on a number of times – this is the reason why: if we shut down they can’t USE U.S. – pun intended – until it gets sorted out, but then again, this is what a monkey in a suit wants for his religious beliefs and brethren. See, ya can’t trust anybody… not even your own family, usually they are the worst too… depends.

Glad I got my butt covered. Hope y’all get on board and dump all your crap and start really paying attention. 7 years from now… KABOOOOOOM! Not bombs, unless you count the exponential growth of metals against their flimsy paper scams. Sigh, some of U.S. DO GET “IT”… we always have.

Strong dollar, my Aunt Fanny,s girdle! With the exception of gas prices and cheaper silver, my fiat dollar buys much less today than even two years ago. A man has to eat and food prices are up considerably. Granted the dollar is doing well against foreign currencies but does that really add to its’ value for the average American consumer? I think not. Quanitative easing, frivolous stimulation packages, the Fed’s juggernaut printing of currencies and ETFs of precious metals have done more harm than anything I have seen in my 63 years of life. The only certainty to this charade is that a correction, that will make the 1928/1929 market crash look like a picnic in the park. The aftermath of this correction will not be pretty and the history books will surely show our government did nothing to intervene in what could have been an opportunity do the right thing. I am not positive my safe filled American Silver Eagles is enough but at least it will cushion my position when the inevitable collapse comes.